Discussion about affordable housing in New York City often centers on renters, but what are the options for buyers? One "budget" route to home ownership: Housing Development Fund Corporation co-ops, which have strict income caps for buyers, are priced below the market rate, and are an appealing option for low- and middle-income buyers.
HDFC buildings were created several decades ago when the city allowed tenants in buildings with derelict landlords to form co-ops and take over their buildings. Some residents bought their apartments for $250 apiece, according to The New York Times—and yes, that's the correct number of zeroes.
HDFC buildings have regulatory agreements specifying the income limits required to purchase a co-op. Naturally, prices have risen substantially since the HDFC program was launched—you most often see HDFCs on the market for $300,000 to $450,000—but in most cases, they're still far cheaper than the going rate in their neighborhoods and often they have more affordable monthly maintenance fees.
[Editor's Note: A previous version of this article ran in May 2019. It has been updated with new information for August 2021.]
Below, our guide to what you need to know about HDFCs and, if you qualify, how to buy one.
How HDFCs work
While similar to Mitchell-Lama co-ops, HDFCs were created under different articles of state regulations known as the Private Housing Finance Laws. Dean Roberts, an attorney with Norris McLaughlin, says while Mitchell-Lamas are beholden to certain laws and regulations, the regulatory agreements for HDFCs can vary depending on the building.
This means HDFCs often function like typical co-ops; rules differ from building to building depending on the bylaws and the board. The state of the building, too, can vary quite a bit.
“On the one hand, it was a good program to open up these buildings, but once they were transferred to tenants, the city pretty much left them alone,” says Kevin McConnell, a partner with Himmelstein, McConnell, Gribben, Donoghue & Joseph (FYI, a Brick sponsor). “The people in charge of running these buildings were not people who had professional expertise, so some are not as well-managed as other co-ops.”
What sets HDFCs apart is the financial structure. It works like this: Most HDFC buildings receive partial tax exemptions and subsidies to help keep operating costs—and maintenance charges for shareholders—at a minimum. Buyers in HDFCs must meet strict income caps either tied to the area median income (aka AMI) or a formula based on the apartment's utilities and maintenance fees.
Some HDFCs require buyers to earn no more than 165 percent AMI, others are limited to buyers whose income does not exceed 120 AMI, and still others are open only to buyers who don’t earn more than six or seven times the monthly maintenance, utilities, and original purchase price per month.
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And as a whole, HDFCs are designed to act as affordable, long-term housing for families, rather than investment properties.
To keep would-be speculators at bay, HDFC owners are usually hit with a significant flip tax when it comes time to sell, up to 30 percent in some cases. The flip tax can be even higher if you have held the apartment for less than five years. While there's generally not a cap on resale price, income restrictions and flip taxes function to keep prices relatively low.
What type of buyer qualifies for an HDFC co-op?
Prices of HDFC co-ops have been creeping up (especially in gentrified neighborhoods like Harlem and the Lower East Side), presenting prospective buyers with a frustrating conundrum: how to come up with a down payment worth tens of thousands of dollars, while still earning less than a building's income cap. (Some units are even advertised as all-cash transactions.)
These conditions end up favoring buyers with low(ish) incomes but significant assets, like retirees, young buyers whose parents are helping them out, or those with trust funds or an inheritance to lean on—not exactly the demographic one thinks of when talking about affordable housing.
HDFCs often attract all-cash buyers because the building needs the cash to cover repairs or debt. And even if the building does accept a buyer with financing, locking down mortgage approval for an HDFC building can be difficult, as banks are wary of financing limited equity co-ops. (In the event of foreclosure, the bank would be bound to the same resale and income restrictions as the shareholder, notes Glaus, not exactly an appealing financial prospect.)
“For the most part, someone interested in an HDFC co-op will not be able to secure financing,” says Serge Joseph, a partner with Himmelstein, McConnell, Gribben, Donoghue & Joseph (a Brick sponsor). “The price of an apartment may not be market price, but because you can’t secure financing, you have to come up with cash, and most people who would qualify for an HDFC under the income requirements do not have $250,000 lying around.”
The listing agent for the building should be able to help you with finding a lender that can provide financing.
Indeed, Joseph says there are some banks that approve financing for HDFCs, or offer special programs for first-time buyers, but identifying these opportunities takes a bit more effort.
Another challenge facing some HDFC buildings is foreclosure: In the past few years the city has foreclosed on dozens of HDFC buildings where taxes or water or sewage charges are past due on the grounds they are “distressed.” When this happens, ownership is transferred to new management, and the building’s shareholders become tenants.
However, this seizure of property—amounting to tens of millions of dollars—is now part of a class action legal fight and HDFC owners recently had a significant victory when the U.S. Court of Appeals for the Second Circuit ruled that their lawsuit could proceed. It’s been argued that the seizure of these buildings targets communities of color, taking away the opportunity to generate inter-generational wealth.
Even with higher prices and eager speculators circulating, most HDFC co-ops are still primarily family- and community-oriented with residents in it for the long haul.
Such has been the experience of Alice (who asked we use a pseudonym), a 20-something florist who, with the help of an inheritance, recently bought into a fixer-upper Williamsburg HDFC.
"I really like my neighbors," she says. "As a born-and-bred New Yorker it's really refreshing to be in a building where almost everyone is older and has been here for a long time (especially in a neighborhood like Williamsburg). My downstairs neighbor grew up in her apartment, and a girl on the first floor is living in the apartment her mom bought in the 80s. There are a lot of interesting characters and everyone is laid back."
Indeed, many HDFC shareholders can opt to pass down their apartment to relatives, provided they follow specific guidelines for succession so it’s possible that generations of a family can live in one unit.
As with many HDFCs, Alice's apartment was in less-than-mint condition when she moved in, lacking basics like a stove and kitchen sink (to complicate matters further, the unit was an estate-sale that had sat empty for years). "Oh god, it was a dump," she says. "It had been vacant for 10 years before I had moved in, so it was completely infested with roaches."
Even more so than in most co-ops, being engaged with how the building is run is often a key part of life in an HDFC. So it’s important to know the history of the program, and to be willing to participate in the governance of the building.
So how do you get an HDFC co-op?
The Urban Homesteading Assistance Board (UHAB) is an organization with the goal of empowering low- to moderate-income residents in their housing goals. It provides services and training for those wanting to buy HDFC apartments, so you can reach out to them for advice and resources as your first step.
To find an apartment, you can put HDFC in the advanced search parameters on listing sites like StreetEasy. (Be aware: This basic search will also bring up listings specifying that a building is not an HDFC.)
“You need to do your due diligence,” Joseph says. “Find out whether the building has been approved for financing, and know the maximum income guidelines. In some HDFCs, you have to comply with private housing finance laws, and they may also have regulatory agreements that are more restrictive.”
As for the rest of the sale process, it's more or less like a slowed down version of what happens when you buy any other co-op, but with a bit of extra paperwork involved. The slower timeline to closing comes from the fact that there’s a government agency involved in oversight.
After the government agency signs off, your package goes to the board for approval, and then your interview is scheduled. Closing could take several more weeks.
—Earlier versions of this article contained reporting and writing by Virginia K. Smith.
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